A Closer Look at Simplifying Financial Aid Applications

By Susan Dynarski and Mark Wiederspan

July 1, 2014

Sometimes, making something simple raises a lot of fears.

A recent Upshot article laid out the economic case for simplification of the college financial aid application known as the Free Application for Federal Student Aid. This form, which has more than 100 questions about income, assets and expenses, could be reduced to just two questions about family size and income.

On Twitter and in comments on that article, readers asked some excellent questions, including: Won’t families with lots of assets (but low income) get Pell Grants if we don’t ask about assets? Couldn’t a wealthy family living solely on capital gains qualify for a Pell Grant in a simplified system?

The short answer is “Yes.” But the longer answer is that such families are so rare that, in our judgment, it’s not worth organizing the aid system around trying to keep them out.

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CreditJoel Plosz

The goal of the federal aid system is to get more low-income students into college. Adding complexity to the aid system, which is what FAFSA does adroitly, needs to be weighed against the effect it has on achieving this bigger goal. It can be worth giving up some precision in the targeting of aid if we get, in return, a simpler aid system that gets more students into college. We found strong evidence that complexity in the aid process discourages low-income students from attending college and that a simpler system would boost their attendance by as much as 25 percent.

Assets have very little impact on the distribution of aid. That is, the added complexity of asking about assets helps very little in getting aid to the right students. For 90 percent of aid applicants, ignoring assets has no effect on the Pell amount, while for 98 percent it changes by less than $500.

Why so little effect? The aid formula already excludes the assets held by the typical family: home equity and retirement savings. Families with low incomes have few other major assets. In the 2010 Survey of Consumer Finances, conducted by the Federal Reserve, we looked at families with children who have incomes below $60,000, an upper threshold for those who qualify for the Pell Grant. Half of these families have less than $1,100 in total financial assets. Ninety percent have less than $6,000 in financial assets outside tax-advantaged retirement funds. And 97 percent have less than $50,000. A similar picture is painted by the National Postsecondary Student Aid Study, a nationally representative survey of college students conducted by the Department of Education.

As these data show, and as recently highlighted by Thomas Piketty, wealth is extremely concentrated in our society. Few families, especially those with low incomes, have substantial financial assets.

Another reason for excluding assets from the calculation of student aid: We currently ignore assets in distributing billions of dollars in education tax credits, which go to households with incomes up to $180,000. Eligibility for the American Opportunity Tax Credit and Lifelong Learning Credit is based solely on data collected in the 1040 tax form; assets don’t enter into the equation.

If we are willing to ignore assets in calculating education credits for upper-income families, it seems logically consistent to do the same when calculating aid for low-income families. If anything, the burden of proof should be higher for upper-income families, since they are so much more likely to hold substantial assets. Consider those near the top of the income range for the education tax credits: in the 2010 Survey of Consumer Finances, 40 percent had more than $50,000 in financial assets outside tax-advantaged retirement funds, compared to 3 percent for those whose incomes put them in the Pell range.

We could continue to ask about assets in order to prevent a small minority of low-income, high-asset families from qualifying for Pell under a simplified system. But this would impose a lot of complexity on the other 97 percent of families, and would discourage many of them from applying for aid and going to college. From our standpoint, this is a case where added complexity is not worth the costs it imposes on the intended beneficiaries of student aid.

A potential, unintended consequence of dropping assets and other questions from the Fafsa is that colleges and states may ask students to fill out additional forms in order to apply to their aid programs. This is a serious risk, since this is exactly where we came from: Decades ago, before the unified form came along, students faced a gantlet of different forms for each state and school. There is not much point in eliminating complexity from the federal process if it’s going to crop back up in the states.

Research shows that the state programs don’t need this complexity for targeting aid. But beyond hard evidence, the federal government should provide carrots and sticks to keep things simple for students who are the target of federal aid. A stick: Bar schools that accept federal aid from requiring a Pell-eligible student to complete any additional financial aid applications. A carrot: Extra funding, perhaps in the form of a block grant, for schools that follow this guideline.

The biggest hurdle may be learning to tolerate minor imperfections in measuring the ability to pay, so that student aid can do its job: Getting more low-income students into college.